Although the German top seven cities (Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich, Stuttgart) are still the most popular places to invest, cities such as Augsburg, Hannover, Leipzig and Nuremberg have become attractive alternatives for investors in the past few years. Although local and international investors already invest in such “B cities”, many investors currently include only the top seven in their investment profiles. So on the one hand, due to the growing market for real estate investments in B cities, there should be adequate sales options in future; on the other hand, you will still find a less competitive environment than in the top seven.
2. Consider investing in value-add properties
As core properties are rare, investing in value-add properties and redeveloping them can be a good alternative. Of course, this strategy requires local development know-how. If you do not have a local team, you will require a local partner. Instead of concluding a project management contract with a local developer, you could consider a joint venture, which have become increasingly popular in recent years as they have the clear advantage that agreeing on a profit share will motivate both parties to participate in the success of the project.
3. Be quick
In a competitive market, it is important to bind the seller as early as possible. New products often sell in forward deals before they are completed. Many investors expect that at the time of signing, lease agreements with the anchor tenants are concluded and the building permit is granted. Investors could consider signing at an earlier stage – of course, this will make the purchase agreement and the negotiations all the more complicated as all uncertainties and risks must be reflected in the purchase agreement. And you will need to stay involved in the construction phase until completion. But this strategy might give you the decisive advantage over your competitors.
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1. Invest outside of the top seven cities
Although the German top seven cities (Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich, Stuttgart) are still the most popular places to invest, cities such as Augsburg, Hannover, Leipzig and Nuremberg have become attractive alternatives for investors in the past few years. Although local and international investors already invest in such “B cities”, many investors currently include only the top seven in their investment profiles. So on the one hand, due to the growing market for real estate investments in B cities, there should be adequate sales options in future; on the other hand, you will still find a less competitive environment than in the top seven.
2. Consider investing in value-add properties
As core properties are rare, investing in value-add properties and redeveloping them can be a good alternative. Of course, this strategy requires local development know-how. If you do not have a local team, you will require a local partner. Instead of concluding a project management contract with a local developer, you could consider a joint venture, which have become increasingly popular in recent years as they have the clear advantage that agreeing on a profit share will motivate both parties to participate in the success of the project.
3. Be quick
In a competitive market, it is important to bind the seller as early as possible. New products often sell in forward deals before they are completed. Many investors expect that at the time of signing, lease agreements with the anchor tenants are concluded and the building permit is granted. Investors could consider signing at an earlier stage – of course, this will make the purchase agreement and the negotiations all the more complicated as all uncertainties and risks must be reflected in the purchase agreement. And you will need to stay involved in the construction phase until completion. But this strategy might give you the decisive advantage over your competitors.
4. Be flexible in agreeing on payment models
For an investor in a forward deal scenario, agreeing on payment upon completion of the building is the safest and therefore the most popular payment mechanism. Many of your competitors may not have the flexibility to agree on such a model. It goes without saying that forward payments bear a much higher risk for the purchaser, therefore, protection mechanisms must be included. If the seller cannot offer you securities – such as a land charge on the property – you could agree on a right to step in on the construction contracts and complete the building should completion stop, for instance, in case of insolvency of the seller.
5. Avoid paying RETT
If you buy a property in Germany by way of an asset deal, you have to pay real estate transfer tax. The RETT rate is 3.5-6.5% of the purchase price, depending on the federal state in which the property is located. However if you buy a property by way of a share deal, it is possible to avoid the RETT. The basic principles are: if the property-owning company is a partnership, only up to 94.9% of the partnership interest can be transferred within five years. If the propco is a limited liability company, 100% of the shares can be transferred, but only up to 94.9% can be purchased by purchasers of an (economic) purchaser group. At the moment, this legal possibility is politically strongly disputed and the dispute might lead to a change of legislation in the near future. At least for now, share deals are still an alternative to be considered to effectively lower purchase prices.
